Wednesday, August 15, 2012

Note Receivable Interest Journal Entry

A company accepted a $8,000 interest-bearing note receivable from a customer on July 1. The interest bearing note requires payment of 12% annual interest, and both the principal amount of the note and the interest will be due six months later, on Dec.31. 

If financial statements are prepared at the end of July, which of the following entries will the company have to make at the end of July?

A. DEBIT Interest Revenue 80
CREDIT Interest Receivable 80

B. DEBIT Interest Receivable 160
CREDIT Interest Revenue 160

C.  DEBIT Interest Receivable 80
CREDIT Interest Revenue 80

D. DEBIT Interest Revenue 160
CREDIT Receivable 160

Accounting Answer:

$8,000 x .12 = $960 in interest per year that is owed. 

960/12 = $80 interest revenue/month.

The note was issued July 1, and you must prepare financial statements for the end of July. This is the same as one month of intrest. 

DEBIT Interest Receivable 80
CREDIT Interest Revenue 80

The reason you debit Interest Receivable, is because you don't actually receive the cash until Dec 31

The correct accounting answer is C

DEBIT  Interest Receivable 80
CREDIT Interest Revenue 80

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